• No results found

A STUDY OF WORKING CAPITAL MANAGEMENT THROUGH RATIO ANALYSIS WITH REFERENCE TO BHARAT HEAVY ELECTRICALS LIMITED

N/A
N/A
Protected

Academic year: 2020

Share "A STUDY OF WORKING CAPITAL MANAGEMENT THROUGH RATIO ANALYSIS WITH REFERENCE TO BHARAT HEAVY ELECTRICALS LIMITED"

Copied!
11
0
0

Loading.... (view fulltext now)

Full text

(1)

International Research Journal of Management and Commerce Vol. 3, Issue 4, April 2016 IF- 3.861 ISSN: (2348-9766)

© Associated Asia Research Foundation (AARF)

Website: www.aarf.asia Email : editor@aarf.asia , editoraarf@gmail.com

A STUDY OF WORKING CAPITAL MANAGEMENT THROUGH

RATIO ANALYSIS WITH REFERENCE TO BHARAT HEAVY

ELECTRICALS LIMITED

Dr. Amit Kumar Nag*

Dr. Binoy Arickal**

*Assistant Professor, Department of Commerce, Bhopal School of Social Sciences. (BSSS).

**Assistant Professor, Department of Commerce, Bhopal School of Social Sciences. (BSSS).

ABSTRACT

Working capital is basically based on the current assets which are in the form of cash or which

can be easily converted in the form of cash also which helps in meeting day to day requirements

of the business enterprise. Inefficient management of working capital will lead to the downfall of

the organization and visa verse. The working capital is very essential for the business enterprise.

The requirement for having sufficient working capital arises because of the gap in the time

between production & realization of cash from sales. The requirement of working capital varies

from business enterprise to business enterprise and it also depends upon the nature and objective

of the business. Keeping this in view we have tried to evaluate the Working capital position of

BHEL for the years 2010-11 to 2014-15. In this study, we used current ratio, quick ratio,

absolute liquid ratio, working capital turnover ratio, etc for assessing the working capital

position of this organization.

Keywords: Working capital, Current Assets, Current liabilities & Short term liquidity.

INTRODUCTION

The capital is considered as the life of a business. As a human being requires food and air to live

(2)

organization needs money basically for two main purpose, firstly for the establishment of the

organization and secondly to carry out its day to day functioning. This capital can be grouped

under two main categories i.e. Fixed Capital and Working Capital.

Generally in the business there is an operating cycle involved in the sale & realization of cash.

This operating cycle is having a time gap in the purchase of raw materials & converting it into

finished goods, then the finished good is sold and there is also a time gap between selling the

finished goods and converting it in the form of cash. Some of the main purposes for having the

working capital is for the procurement of raw materials, to meet out the day to day expenses, to

pay the indirect expenses like administrative expenses, selling & distribution expenses etc., for

providing the credit facilities for credit sales, to have the stock of raw materials, work in

progress, stores & spares and finished goods, to pay the financial expenses like bank charges,

interest on capital, interest on loan, etc., to pay all the direct expenses which are involved

in production, etc. This paper, aims at assessing the working capital position of BHEL as well as

this paper enables us to examine the factors responsible for significant changes in working

capital during the study period from the year 2010-11 to 2014-15.

JUSTIFICATION OF THE TOPIC

Working capital analysis is of great practical importance as it covers a vast area. Keeping in view

the importance of working capital analysis, we have carried out the present research work titled

―A study of Working Capital Management through ratio analysis with reference to Bharat Heavy Electricals Limited‖ helps in assessing the short term solvency position as well as the growth of

this organization. This paper helps in finding out whether this company has sufficient funds for

the procurement of raw materials, whether the organization can easily meet out the day to day

expenses or other indirect expenses as well as the organization can provide the credit facilities

for credit sales, etc. This topic helps us in judging the short term liquidity position of this

organization as well as it helps in indicating the optimum utilization of the current

assets, working capital as well as the inventors of this organization.

REVIEW OF LITERATURE

Jain (1993) conducted a study among seven paper companies in India to analyze the

(3)

public sector undertaking during the study period was found to be highly erratic, while the same

in private sector undertakings registered continuous decrease. As far as the inventory was

concerned his study revealed that it was highly unplanned in public sector undertakings as

compared private sector undertakings. His study contributed much in terms of realizing the

importance of effective management of working capital.

Salmi and Martikainen (1994) “the research areas are reviewed are the functional form

of the financial ratios, distributional characteristics of financial ratios, classification of financial

ratios and the estimation of the internal rate of return from financial statements. It is observed

that it is typical of financial ratio analysis research that there are several unexpectedly distinct

lines with research tradition of their own. A common feature of all the areas of financial ratio

analysis seems to be that while significant regularities can be observed, they are not necessarily

be stable across the different ratios, industries and time periods. This leaves much space for the

development of a more robust theoretical basis and for further empirical research.‖

Reddy and Rao (1996) conducted a study on Hindustan Cable Ltd for the period

1989-90 to 1993-94. Having studied current ratio, quick ratio, working capital turnover ratio, etc they

concluded that the liquidity position of the company was unsatisfactory. However the study

revealed that there was a sign of improvement in the management of inventory and

ineffectiveness in the management of debtors. The study recommended for effective utilization

and control of current assets.

N.K. Sharma (1998) he specified in his book that the practical techniques used in

working capital management for measuring the liquidity of the business enterprise and analyzing

can be done through its sources of financing. According to him financial managers through

working capital management can decide what quantities of cash, other liquid assets, accounts

receivables and inventories should be maintained for the business enterprise. According to him

the management of working capital plays a very dominant role in maintaining the financial

health of the business enterprise during the normal course of business.

Eljelly, Abuzar M.A (2004) empirically examined the relationship between the

profitability and liquidity on a sample of joint stock companies which are operated in Saudi

(4)

position of the firms. At the industry level, the cash conversion cycle was more important than

current ratio as a measure of liquidity.

OBJECTIVES OF STUDY

The study fulfils the following objectives:

(i) To analyze the current assets, current liabilities and liquid assets of BHEL for working

capital analysis.

(ii) To identify the items responsible for changes in working capital position of BHEL.

HYPOTHESIS

In order to achieve these objectives, the following null hypothesis is framed for testing:

Ho: There is no significant difference in the Working capital position of BHEL during the period

of study.

LIMITATIONS

The following are the limitations of the study

(i) Any uneven trend before or beyond the set period will be the limitations of the study as we

have considered the data for the last five years.

(ii) This analysis is based on financial information only.

(iii) We have grouped and sub grouped some data for this study.

(iv) Sufficient data & literature was not available for this study.

(v) We have used the secondary data for this study.

Methodology

For the study, statistical data has been collected from the annual reports published by the

Bharat Heavy Electricals Limited. The statistical techniques like percentage, averages,

coefficient of correlation, coefficient of variation, T-test have also been applied. For proper

analysis and evaluation the individual items of profit and loss accounts and balance sheet have

also been regrouped.

(5)

For analyzing the Working capital analysis of BHEL from the year 2010-11 to 2014-15, liquidity

ratios has been used. In order to measure the working capital position we have used the current

ratio, quick ratio, as well as the absolute liquid ratio and working capital turnover ratio.

1. Current Ratio

The Current ratio measures the firm‘s short term solvency and it indicates the availability of

current assets in rupees for every one rupee of current liability. A greater ratio indicates that the

firm has more current assets than current claims & the ideal ratio is considered as 2:1. On the

other hand if this ratio is low then it represents the liquidity position of the firm is not good.

Current Ratio = Current Assets

[image:5.612.115.498.311.625.2]

Current Liabilities Table No. 1: Statement Showing Current Ratio (Rs. In Crores)

Year Current Assets Current Liabilities Current Ratio

2010 - 11 43588 25257 1.725779

2011-12 49090 29155 1.683759

2012-13 51410 28197 1.823244

2013-14 52395 25996 2.015502

2014-15 49040 22817 2.149275

Mean 49104.60 26284.40 1.88

SD 3412.44 2503.00 0.20

CV 6.95 9.52 10.52

Growth % 12.51 -9.66 24.54

Average

Annual

Growth

2.50 -1.93 4.91

Source: Compiled from Annual report of the BHEL (From 2011-2015).

(6)

As per table no.1, the working capital position of this organization seems to be

improving. Initially it was at 1.72:1 and it got increased to 1.82:1 by 2012-13. There was a

further increase as it was at 2.14:1 by 2014-15. The mean was at 1.88: 1 where as the coefficient

of variance was at 10.52%. The growth reflected at 24.54% and the average growth was at

4.91%.

2. Liquid Ratio

The liquidity ratio or Quick ratio refers to the ability of the firm to pay its short term obligation

as and when they become due. The liquid assets should not include stock & prepaid expenses

which cannot be converted into cash within a short period. The ideal ratio is considered as 1:1. It

measures the firm‘s capacity to pay off current obligations immediately and it is a more rigorous

test of liquidity than the current ratio. It is used as a complementary ratio to the current ratio.

Liquid Ratio =Current LiabilitiesLiquid Assets

Liquid assets = Current assets – (Stock + Prepaid expense)

Table No. 2: Statement Showing Quick Ratio (Rs. In Crores)

Year Liquid Assets Current Liabilities Quick Ratio

2010 - 11 32685 25257 1.294097

2011-12 35565 29155 1.219859

2012-13 39541 28197 1.402312

2013-14 42587 25996 1.638214

2014-15 38929 22817 1.70614

Mean 37861.40 26284.40 1.45

SD 3819.71 2503.00 0.21

CV 10.09 9.52 14.63

Growth % 19.10 -9.66 31.84

Average Annual

(7)

Source: Compiled from Annual report of the BHEL (From 2011-2015).

Interpretation

As per the above table no.2, the quick ratio of this organization seems to be improving.

Initially it was at 1. 29:1 and it got increased to 1.40:1 by 2012-13. There was a further increase

as it was at 1.70:1 by 2014-15.the quick ratio was more than the ideal ratio of 1:1 throughout the

study period. The mean was at 1.45: 1where as the coefficient of variance was at 14.63%. The

growth reflected at 31.84% and the average growth was at 6.37%.

3. Absolute Liquid Ratio

The absolute liquid ratio is more rigorous than current ratio and quick ratio. This ratio is

calculated to find out the firms capacity to pay current obligations very immediately. The

absolute liquid ratio is calculated by dividing absolute liquid asset by liquid liabilities. The

absolute liquid asset includes cash in hand, cash at bank and marketable securities. The

acceptable norm for this ratio is 0.5:1.

Absolute Liquid Ratio =Absolute Liquid Assets Current Liabilities

[image:7.612.84.530.393.665.2]

Absolute liquid assets = Cash in hand+ Bank balance+ Marketable securities

Table No. 3: Statement Showing Absolute Liquid Ratio (Rs. In Crores)

Year Absolute Liquid

Assets Current Liabilities Absolute Liquid Ratio

2010 - 11 9706 25257 0.38429

2011-12 6734 29155 0.230972

2012-13 7852 28197 0.278469

2013-14 12019 25996 0.46234

2014-15 9948 22817 0.435991

Mean 9251.80 26284.40 0.36

SD 2040.05 2503.00 0.10

CV 22.05 9.52 27.94

(8)

Average

Annual

Growth

0.50 -1.93 2.69

Source: Compiled from Annual report of the BHEL (From 2011-2015).

Interpretation

As per the above table no. 3 the absolute liquid position of this organization seems to be

increasing. Initially it was at0.38:1 and it got increased to0.46:1 by 2013-14. However there was

a slight decrease as it was at 0.43:1 by 2014-15. The mean was at 0.36: 1 where as the coefficient

of variance was at 27.94%. The growth reflected at 13.54% and the average growth was at

2.69%.

4 Working Capital Turnover Ratio

The Working capital turnover ratio measures the utilization of working capital & the number of

times the working capital is rotated in the course of a year. A greater ratio indicates that the

organization has utilized the working capital efficiently & on the other hand, if this ratio is low,

then it represents organization has not utilized the working capital efficiently.

Working capital turnover Ratio =Cost of goods sold

[image:8.612.80.526.51.125.2]

working capital

Table No. 4: Statement Showing Working capital turnover Ratio (Rs. In Crores)

Year Cost of goods sold Working

Capital

Working Capital Turnover

Ratio

2010 - 11 23366 18331 1.274671

2011-12 29132 19935 1.461349

2012-13 28171 23213 1.213587

2013-14 22465 26399 0.850979

2014-15 18270 26223 0.696717

Mean 24280.80 22820.20 1.10

SD 4442.17 3640.69 0.32

(9)

Growth % -21.81 43.05 -45.34

Average

Annual

Growth

-4.36 8.61 -9.07

Source: Compiled from Annual report of the BHEL (From 2011-2015).

As per table no.4, the working capital turnover position of this organization seems to be

declining during the study period. Initially it was at 1.27 times and it got increased to 1.21 times

by 2012-13. There was a further decrease as it was at 0.69 times by 2014-15. The mean was at

1.10 times where as the co-efficient of variance was at 28.71%. The growth reflected at -45.34 %

and the average growth was at -9.07%.

TESTING OF HYPOTHESIS

In this study the hypothesis has been analyzed by t-test as the significance of data can be

analyzed by means of statistical tools. Hence correlation & t- test have been applied in this study.

Ho: There is no significant difference in the Working capital position of BHEL during the period

[image:9.612.86.530.51.149.2]

of study.

Table No. 5. Paired Samples Statistics

Mean N Std. Deviation Std. Error Mean

Pair 1

Current

Assets 49104.60 5 3412.44 1526.09

Current

[image:9.612.72.541.426.743.2]

Liabilities 26284.40 5 2502.99 1119.37

Table No. 6. Paired Samples Correlations

N Correlation Sig.

Pair 1 Current Assets & Current Liabilities 5 .273 .657

Table No. 7. Paired Samples Test

(10)

(2-Mean

Std.

Deviatio

n

Std.

Error

Mean

95% Confidence

Interval of the

Difference

tailed)

Lower Upper

Pair 1 Current Assets -

Current Liabilities 22820.20 3640.69 1628.17 18299.69 27340.71 14.02 4 .000

Interpretation

t = 14.02, t 0.05 = 2.776

t > t 0.05

When the degree of freedom is 4 & the level of significance is 5%, the critical value of t 0.05 is

2.776. Since the calculated value of t is 14.02 which is more than the critical value we conclude

that the null hypothesis is rejected there is significant difference in the Working capital position

of BHEL during the period of study.

SUGGESTIONS

 Steps should be taken by the company to maintain the current ratio at an ideal standard of

2:1 as the working capital position was satisfactory from 2012 to 2015.

 For the betterment of short term solvency the company should try to reduce its current

liabilities.

 The company should try to improve their cash position by taking short term loans or

through bank overdraft for making the payments of day to day expenses and other current

obligations.

 The company should try to effectively utilize its stock hence the corporation should have

better policies to reduce its stock.

 The working capital of the company was not properly utilized as the working capital

turnover ratio was low during the study period, hence corporation should try to utilize its

working capital efficiently by reducing the cost of goods sold.

 The company should improve the composition of the current assets like inventories,

(11)

REFERENCES

 Booth, G., Martikainen, T., Perttunen, J., and Yli-Olli, P. (1994), "On the functional form

of earnings and stock prices: international evidence and implications for the E/P

anomaly", Journal of Business Finance and Accounting 21/3, 395-408.

 Deloof, M. (2003). ‟Does Working Capital Management Affect Profitability of Belgian

Firms?‘‘ Journal of business finance & Accounting, Vol 30 No 3&4, pp.573-587.

 Eljelly, Abuzar M.A. (2004): ‗‗Liquidity-Profitability Trade Off - An Empirical Investigation in an Emerging Market‘‘, International Journal of Commerce and

Management, Vol.14, Issue 2, pp.48-61.

 Nag, Amit Kumar. & Arickal, Binoy. (2016), ―Evaluation of Working Capital Management of Indian Oil Corporation Limited‖, Paripex-Indian Journal of Research,

[ISSN No. 2250 – 1991], Volume: V, Issue: III, March – 2016.

 Raheman, A., Nasr, M., (2007). Working capital management and profitability: case of

Pakistani firms. International Review of Business Research Papers, Vol.3 No.1, Pp. 279 -

300.

 Rej, Debasis and Sur, Debasish. (2001): ‗‗Profitability Analysis of Indian Food Products

Industry—A Case Study of Cadbury India Ltd.‘‘, The Management Accountant,

November Issue, p. 845.

Figure

Table No. 1: Statement Showing Current Ratio (Rs. In Crores)
Table No. 3: Statement Showing Absolute Liquid Ratio (Rs. In Crores)
Table No. 4: Statement Showing Working capital turnover Ratio (Rs. In Crores)
Table No. 6. Paired Samples Correlations

References

Related documents

Bidder has to submit “NO DEVIATION CERTIFICATE FOR COMMERCIAL TERMS AND CONDITIONS as per General Conditions of Contracts (GCC, Rev.07), Special Conditions of Contract (SCC, Rev.01)

e) Building Management System: Shall design Building Management and Control system for the entire data centre. BMS should be able to integrate all physical and electronic systems

a) Installation and Configuration of both Server Operating System and Exchange 2010 on H/W Servers provided as per the requirement of BHEL Trichy. b) Implementation of the

Against this enquiry for the subject item/system with detailed scope of supply as per enquiry specifications, BHEL may resort to “REVERSE AUCTION PROCEDURE” i.e.,

Invoices shall necessarily cont ain Invoice num ber (in case of mult iple num bering syst em is being follow ed for billing like SAP invoice no, comm ercial invoice no et c., t hen

event be entitled to terminate this Contract nor shall either party have any claim for damages against the other in respect of such non-performance and delay in

LOADING @ (SBI BASE RATE ON TENDER OPENING DATE+ 6% ) ON THE PART ADVANCE AMOUNT (X%) FOR THE DELIVERY PERIOD (ROUNDED OFF TO NEAREST MONTH) + 1 MONTH AND LOADING @ (SBI BASE

 If any of the tenders not fulfilling the laid down conditions (qualification criteria) or non-submission of valid documents within the time limit prescribed by BHEL, their